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RESEARCHThere is little doubt that natural disasters have a significant detrimental impact on the developing world. On an annual basis over the past decade, developing countries absorb $35 billion a year in damages from natural disasters. The damages are equally split between floods, windstorms and earthquakes. On a per capita GDP basis, this is 20 times the cost in the developed world. The long term implications from catastrophes depend in part on the availability of funds to restore lost capital stocks, including infrastructure. Generally speaking, the poorest developing countries lack internal resources to meet the demand for reconstruction financing. In the developing world, less than 2% of the costs of catastrophes are absorbed by any form of insurance, compared to 50% of the costs of catastrophes covered by insurance in the United States. The Natural Catastrophes in Developing Countries project ran from September 1999 through June 2001 to study the macroeconomic impacts of natural catastrophes on developing countries, evaluate the benefits of risk mitigation, and develop tools to finance the cost of post-disaster reconstruction. |
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The research involved: Case studies: Argentina, Honduras, Nicaragua. Thematic studies: privatization, climate change, energy infrastructure, poverty, insurance demand
Case Study: ArgentinaThis study, the first of a series of four in partnership between the World Bank, Swiss Re, and the International Institute for Applied Systems Analysis (IIASA), emphasizes the need to account for natural catastrophes in national economic planning. With tools to measure catastrophe risk and exposure, the work illustrates that planners can incorporate the economic impacts of a natural catastrophe in developing long-term assistance strategies. This study focuses on flood losses to Argentina and estimates that the country faces an annual contingent exposure of 650-950 million pesos in lost capital stock due to flooding. Second, it traces the potential sources of replacement capital finance and shows how incorporating contingent catastrophe losses can lead to better estimation of macroeconomic performance. The methodology employed integrates capital stock losses into the World Bank's Revised Minimum Standard Model (RMSM). With estimates from flooding of 2 billion pesos of losses due to 10-year events, 9 billion pesos of losses due to 100-year events, and 12 billion pesos of losses due to 1,000-year events, the work traces the macroeconomic costs of those losses assuming Argentina immediately rebuilds following a catastrophe. Please contact the project for a copy of the full report. Case Study: HondurasThis studies, the second of a series of four in partnership between the World Bank, Swiss Re, and the International Institute for Applied Systems Analysis (IIASA), explores the impact of the availability of post-reconstruction financing on the long-term macroeconomic impacts of catastrophes. Using tools to measure catastrophe risk and exposure, the work illustrates that planners can incorporate the economic impacts of a natural catastrophe in developing long-term assistance strategies. The methodology employed integrates the natural catastrophe loss calculations into the World Bank's Revised Minimum Standard Model (RMSM). This study focuses on natural catastrophe losses in Honduras. It first estimates that the country faces an annual contingent exposure of 870 million lempira, that is, 82 million USD, in lost capital stock due to natural catastrophe exposure. Second, this report demonstrates how incorporating natural catastrophes into the planning process changes macroeconomic projections. Third, the report investigates the macroeconomic implications of Honduras being unable to obtain enough foreign funding post-catastrophe to immediately replace lost capital stock. Available for download: Paper for the World Bank ABCDE conference 2000 Europe summarizing findings of Honduras study. Please contact the project for a copy of the full report. Case Study: NicaraguaThe discussion of the economic impacts of natural catastrophes does not remain at the macroeconomic level, but delves deeper to examine poverty impacts. "The challenge of development," Sen states, "includes both the elimination of persistent, endemic deprivation and the prevention of sudden, severe destitution. However, the respective demands on institutions and policies of the two can be distinct and even dissimilar. Success in one field may not guarantee success in the other." (Sen 1999) Poverty is an important issue in Nicaragua, where about half of the population lives at or below the poverty line. In rural areas, where impacts of Hurricane Mitch were particularly strong, three-fourths of the population live below the poverty line (WorldBank 2000). Understanding the impacts of disasters on both development and the poverty are motivations for this work. The report on Nicaragua examines the impact of catastrophes on long-term development and poverty. It carries three major themes. The report first estimates that the country faces an annual contingent exposure of 240 million cordobas (20 million USD) in lost capital stock due to natural catastrophe risk. Incorporating this annual contingent exposure into the planning process changes macroeconomic projections for Nicaragua. The study then identifies possible sources for post-catastrophe reconstruction finance and evaluates Nicaragua's ability to mobilize sufficient internal and external resources for reconstruction in a timely manner following a catastrophe. The final section investigates the macroeconomic and poverty implications of Nicaragua being unable to obtain enough external funding post-catastrophe to immediately replace lost capital stock and provide income support for the poor. Please contact
the project for a copy of the full report. Thematic Study: PrivatizationIn an effort to reduce the burden of state-owned assets on public budgets, increase efficiency and provision of important goods and services, governments have turned to the private sector to build, operate, finance, and own "life-line" infrastructure in sectors such as power, transport, communications, and water. Over the past two decades, natural catastrophes in developing countries have caused increasing damage to infrastructure. Little research has been done on the relationship between infrastructure privatization and infrastructure vulnerability to natural catastrophes in developing countries. A framework for analyzing government investment decisions under uncertainty, however, does illuminate how a government might choose to address extreme shocks such as a catastrophe and bears important implications for the privatization process. Governments make a series of investment decisions with uncertain outcomes. Public investment in infrastructure projects, for example, are vulnerable to damage from natural catastrophes. Government response to extreme shocks that affect public investments depends on the country's relative ability to absorb those shocks. Appropriate responses to extreme shocks such as natural catastrophes that destroy infrastructure should be related to a country's available resources to address those losses. The attitude towards risk adverse or neutral affects how a country deals with investment decisions under uncertainty. If a country has a low capacity to respond to an extreme event, then it will be risk averse and willing to pay more than the expected value of the outcome. If a country has a high capacity to respond to extreme shocks, it will be risk neutral and choose to pay only the expected value of the outcome. Reexamining the assumptions underlying classic decision making under uncertainty theory illuminates the impacts of wealth and a country's ability to spread risk on that country's attitude towards and policies to address risk in areas such as infrastructure privatization. The current privatization process may provide an opportunity for governments to take a new approach to infrastructure risk management. Current practice allocates the burden of catastrophe risk allocation to governments even when infrastructure is privatized, assuming that governments are risk neutral. Reexamining the assumptions about when a government should assume risk (when it is risk neutral), and when it would be willing to share the risk (when it is risk averse) suggests an array of policy options for the infrastructure privatization process. Thematic Study: Climate ChangeThe risk from natural disasters is increasing. More hurricanes and floods are predicted to result from global climate change. Since flooding and hurricanes tend to recur in the same regions, the exposure to countries already subject to risk will increase. All flooding, for example, occurs on 1% of the earth's landmass. More assets are being concentrated in hazard prone regions from increasing urbanization in the developing world. Unfortunately, most of the fastest growing cities in the developing world are in coastal regions exposed to floods or hurricanes. Coastal zone cities will be subject to even greater risk from sea level rise as a result of global climate change. Thematic Study: Energy InfrastructureAnnually, $12 billion of infrastructures are lost to floods in Asia, where 70% of all floods occur. Each year, the damage to existing infrastructure is equivalent to at least 5% of the additional infrastructure installed in the developing world. A large component of infrastructure is energy infrastructure: Energy infrastructure in low-income countries constitutes about 25% of total infrastructure and is the fastest growing component of new infrastructure. Access to reliable and reasonably priced energy is an important catalyst for economic growth and better access to energy services for the poor has direct as well as indirect poverty alleviating effects. An important means of increasing access to energy services for rural and urban poor is the installation of off-grid services like stand-alone photovoltaic systems, fuel cells, minigrids and other isolated energy systems. This proposed project, which would be carried out collaboratively by the International Institute for Applied Systems Analysis (IIASA) and the World Bank’s Disaster Management Facility (DMF), would focus on reducing natural hazards vulnerability of energy infrastructure in developing countries. Two broad objectives will be pursued: First an assessment of natural disaster risk to energy infrastructure and consequences of loss energy infrastructure will be done. Second, strategies to reduce catastrophe risk will be developed. Thematic Study: PovertyHow do natural catastrophes accentuate poverty in developing countries? What mechanisms influence movements in income and wealth for different subsets of the population? How do different ex ante and ex post strategies affect the impact of catastrophes on the poor? The burden of natural catastrophes falls disproportionately upon the poor. This study examines the distributional impacts of natural catastrophes on the poor. Thematic Study: Insurance DemandThis work investigates the role the private market could play in hedging risk of loss from disasters in the developing world. It focuses on developing a theory to evaluate potential demand by developing countries for hedging catastrophe losses. |
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Natural
Catastrophes and Developing Countries Project
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